Because of high costs (attributable in most part to
regulatory and land use policies),
building new market-rate rental housing in PA or SF is impossible.

"Costs are way up compared to the last RHNA round. All cities are going to do
a much worse job of meeting ABAG affordability targets."

There’s affordable housing and there’s market rate housing, and there’s a
$500,000 PA price “gap” in between. The gap is at an all-time high. The
housing market is broken. In PA, there’s currently no way to create product
in-between $350,000 (subsidized affordable) and $850,000 (Hyatt Rickey’s and
East Meadow
projects). “Nothing is built in the middle.”

Castle Group is a technology leader in factory-built housing, where sections
of homes are built off-site (with cheap labor) and then trucked in. At 60 DU/acre,
factory housing can save compared to on-site construction, but not enough to
un-break the housing market. Claims that pre-fab technology can make a
significant dent in housing prices are untrue. There is no silver bullet.

That
being said, SPUR shows a way to unbreak the housing market. SPUR’s affordable
by design vision of 5-story stick frame construction over podium parking
really is the way for PA to go. For SF, the ambitious plan is to split the DUs
as follows: 60% market rate, 40% moderate affordable at 133% or 150% of area
median income (AMI). This is a re-definition of “moderate” to a pricier level
than the traditional 120% AMI moderate definition, but it is also more
realistic. The vision is for 800 square foot (sf) two-bedroom for-sale condos
as workforce housing, priced at $450,000. Hard core residential TDM is a key
part of this – less parking really matters.

Hence, we must remove PA’s 50’ height limit and follow all of SPURs
recommendations.

And we should build tall within walking distance of Caltrain.

PA
has much higher land costs than SJ, so the product that may make the most
sense? 8-20 story steel frame housing (try Avalon Towers in MV). Not popular,
but PA’s 40 years of “drawbridge mentality” have bid up land values to create
a distorted housing market. This is truly PA’s own doing.

For the state of CA, the state is responsible for modular housing building
code and inspection. It would be exceedingly difficult to build standardized
modular housing for multiple cities at an off-site location and having
multiple local city inspectors be responsible for plan check and inspection.
IE you can’t subject standardized product to randomized building codes and
inspections. Building inspection has to occur at the factory site. Not all
states are this advanced.

San Jose has been terrific to work with on this factory housing. I would
expect affluent cities to slow down factory-built housing entitlements.

City Architecture Review Boards could present some challenges for
factory-built housing

Palo
Alto has been given a
RHNA allocation of 2,860 housing units for 2007-2014 by ABAG. About 50% of
these units are moderate, low, or very low income. Given 15% inclusionary
zoning, how do we build these affordable units? Palo Alto Housing Corp and
other affordable builders struggle to build 100 subsidized DUs every 5 years in
Palo Alto. Can we build a substantial portion of the affordable allocation using
"affordable by design?"

Other
affluent Santa ClaraCounty
and San Mateo County cities have very similar challenges, so this challenge
applies far beyond Palo Alto. I met with ABAG and I was disappointed that they
really didn't have any sort of a solution as to how affluent cities with high
land costs could build large numbers of affordable DUs. ABAG recommends looking
at pre-fab housing, but does not share any insight about it.

MEETING
NOTE: I want to emphasize that ABAG and HCD are dropping the ball about figuring
out how to build lots and lots of affordable housing. They truly are dumping an
unfunded mandate on cities. In contrast, SPUR is making an important
contribution towards solutions.

1.
The big question:

“What
would it take for Santa Clara, Sunnyvale, Cupertino, Saratoga, Mountain View,
Los Altos, Palo Alto, Menlo Park, San Mateo, Redwood City, San Carlos, Belmont,
Foster City, East Palo Alto, Burlingame, San Bruno, Millbrae, and South San
Francisco to build 7,000 standardized mid-rise affordable units in 7 years (at a
substantial buyer cost savings compared to current costs)?" Would sub-regional
collaboration, standardization, and large economies of scale help?

ANSWER:
sub-regional collaboration would not be a silver bullet.

2.
Pre-fabrication / manufactured housing / panelization

Says
Scott Ward: There is no silver bullet on pre-fab, or else everyone would be
doing it. For 3 story stick, surface parking, a $700 per sf (buyer price)
home only has $125-$150/sf in building construction cost. HUD’s claim that
you can cut that $150/sf by 50% is dead wrong! Even if HUD was correct and
construction cost could be cut by $75/sf, that’s only a 10% bottom line
savings to the buyer. Land cost, impact fees, etc add too much to housing
costs in PA.

MEETING
NOTE: There are many costs that are apportioned to each DU: land costs, site
improvements, podium parking, city fees. Building a housing structure on the
cheap is only a small part of the battle.

LONG
MEETING NOTE: Housing cost at different densities.

PA
builders typically obtain a 12% to 17% profit margin. I’ll explain a table
below that shows that the market rate units have a much higher profit margin,
but 15% to 20% of DUs are BMR. Builders lose money on BMR units. So, really,
builders don’t make exorbitant profits, despite what residents think.

The
builders’ overall
SouthBay
cost is roughly $480 per sf. This includes land acquisition, site
improvements, construction, parking construction, fees, financing, carrying
costs, etc. San
Jose land costs
less than PA land. Intuitively, 60DU/acre should cost less per sf than
20DU/acre, but this is not the case. Denser housing has more economies of
scale, but this is offset by higher per unit parking costs and higher land
costs. Land enabled to be entitled for 60DU/acre in PA would sell for more
than $6M/acre. “High density multifamily (60DU/acre) is a relatively
low-margin, high-volume business.”

Denser housing lowers the square footage, that’s why the buyer pays less per
unit. In PA, the condo buyer’s retail cost is $700+ per sf.

Here
is market price housing cost at 20 and 60 DU/acre.

Density

sf per DU

Bldrs overall
cost per sf

Bldrs overall
cost per DU

Buyer's price

20 DU/acre

1,600

480

$768,000

$1,120,000

60 DU/acre

1,100

480

$528,000

$730,000

15%
(20% if 5 acres or more) DUs are BMR. BMR condos are sold for roughly
$350,000, though price varies with sf and other considerations.

More
about builders’ margins. Builders have to buy land on speculation, hold onto
land with high carrying costs, go through bruising, lengthy public approval
processes, and ride out industry downturns. Cost of sales (commissions,
closing costs, fees, etc) take an additional 5% out of the buyer’s price,
reducing builder margin further. Development is not a job for the
faint-hearted. Just look at the recently insolvent US Top 10 builder Lennar.

PA has a
“drawbridge mentality,” so housing is artificially scarce. This increases
builder profit margin compared to other cities. Developers need a risk
premium to justify doing business in as unpredictable and difficult a place as
Palo Alto. Comparatively, typical developer margin in more predictable cities
like San Jose and Milpitas is 12% above cost.

MEETING
NOTE:

ConXtech in
Hayward produces snap together steel frame components for 6-10 story steel
residential. Plan is also to go with a “podular” concept, IE euro pre-fab
style kitchen/bath walls with appliances and shelves. CEO is Robert Simmons.

A
related point, even if market rate developers could build product for a very low
cost per sf, they have no incentive to keep buyer prices low. IE, they'll just
sell at $700/sf, no matter how much it costs them. IE it would be silly for
for-profit developers to sell a unit for $500K when they could get $750K for
it. They wouldn't pass on the savings. Hence, "not for too much profit"
developers would be required. Lydia Tan runs Bridge Housing’s BUILD division,
one such example. This almost argues for a "cost plus" model.

4.
Five-story stick over podium (SPUR’s Affordable-by-design Report)

SPUR
has a report on affordable by design. Sara Karlinsky was the lead SPUR
staffer. Lydia Tan was on the report’s panel. See:
http://www.spur.org/documents/2008.01Interiors_FINAL.pdf. (Pages 2-9.)
SPUR advocates 65’ tall 5 story stick ontop of a 1 story podium as hitting a
cost sweet spot. San Diego and Seattle have modified fire codes to enable
this. SPUR also advocates for some commonsense modifications to zoning and
planning codes, arguing to enable more DUs rather than larger DUs for bigger
families.

Ownership housing is part of SF’s strategy to keep families in town by
providing workforce housing.

Plan
is for mostly 5 story stick above podium, not super high rises (like Rincon
center).

4C.
What is the state of the art of squeezing down square footage per person. Can
we eliminate bedrooms, replacing them with futons or Murphy beds? It works in
Japan.

Berkeley's Gaia
Building has been held up an example of nice Dan Solomon small sf design.

Beds

Baths

Rent Range

Square Ft.

2

1

$2175 - $3560

600 - 790

3

1

$2890

865

4D.
John Barton: We have to reduce parking requirements

The
Opportunity Center has two stories of underground parking, mostly empty. Each
parking space is very expensive, so we have to reduce the number of required
spaces. 20% of the Opportunity Center cost was in parking construction, much of
it wasted.

5.
Other meeting notes

The
state is providing BILLIONS to fund in-fill TOD. Alas, PA has no projects in
the pipeline that would qualify for this. Oakland and other cities are going
after this funding aggressively.

“Arlington was a very comparable, snooty city like PA, but transformed itself
with an extremely dense, vibrant TOD spine within 20 years. Arlington
thrives. Arlington did darn close to perfect in those 20 years. They got
everything right.”

Here’s an important theoretical concept – politically, we can’t implement the
proposed solution. The concept is the “zoning tax” from top Harvard housing
economist Edward Glaeser. Cost of housing is a function of land use and
zoning regulations. The more restrictive, the higher the cost. IE in an
unregulated (truly free) housing market starting from 1960, PA would have
triple the number of homes and homes would cost $350,000. (No drawbridge
equals many cheap homes.) Back when land was still cheap, SFH neighborhoods
would have been transformed into dense, multifamily neighborhoods.

Hence, to lower the cost of housing, remove regulation and let the housing
market be flooded with many, many new homes. (But, you have to do this
before the cost of land is too high, or wait for a titanic housing market
crash.) Once home values are high, voters will keep them that way. It’s
impossible to deregulate PA’s housing market.

Why should Orlando housing be 1/3 the cost of the Bay Area? It’s because
they don’t restrict residential development like the Bay Area does.

Randal O-Toole provides a good summary:
http://www.heartland.org/Article.cfm?artId=10635 . Anaheim, LA, and NYC
are really bad, and SF is twice as bad as them. In ROT’s own work he
villainously (and incorrectly) argues that smart growth is bad and sprawl is
good. Glaeser, our hero, is a huge advocate of urbanism.